Cyprus rejects tax on bank deposits as condition for international bailout

Cyprus bailout bill rejected over bank tax condition

The Cypriot parliament on Tuesday overwhelmingly rejected a controversial tax on bank deposits that was one of the conditions of a €10-billion ($13.22-billion) bailout package by the International Monetary Fund and the eurozone.

President Nicos Anasta­siades must go back to eurozone leaders to try to renegotiate the deal or, failing that, prepare for Cyprus to default on its debts — a prospect he earlier warned would result in “indescribable misery” for ordinary Cypriots.

Hammered out by euro-zone finance chiefs over the weekend, the deal had sought to raise €5.8-billion euros by drawing funds from Cyprus bank accounts in return for international aid.

Protesters celebrated in the streets Tuesday night after the rejection of the levy left the eurozone bailout in chaos.

The European Central bank late Tuesday reaffirmed its commitment to provide liquidity as needed to Cyprus’s banks “within its existing rules.” In a brief statement, ECB said it took note of parliament’s decision and it was in contact with its partners in a troika of lenders, which include the European Commission and the IMF. The bailout had been agreed in part to prevent two Cypriot banks, which rely on emergency funds from the country’s central bank, from collapsing.

Cypriot authorities are working with officials from ECB to develop contingency plans, including capital control measures, to stem potential capital outflows when banks on the island reopen, three officials with knowledge of the situation said.

The plans include imposing limits on daily withdrawals from bank accounts; capping the amount of money that can be electronically taken out of the country and making these transactions slower to clear; and introducing border checks to ensure no more than a certain amount of cash would leaving the country, officials said.

Cyprus has shut its banks until at least Thursday, with the country’s stock exchange also closed amid fears of a catastrophic run on the banks as savers rushed to withdraw savings.

“This is an unprecedented situation, nothing like this has happened anywhere before,” said Dino Sophocleous, a director of the Cypriot Federation of Canada.

“This tax [would have ] targeted ordinary people. If this can happen in a European country, why not here in Canada? I think that’s the question we need to ask ourselves.”

There are as many as 40,000 Cypriot-Canadians, according to Mr. Sophocleous, who says his organization speaks for the majority.

The failure of the bailout vote in the Cypriot legislature increases the risk that the problems will spread to the rest of Europe, he said. “I think the temperature just went up about 100 degrees and I think the ball is now in the [eurozone] court.”

Mr. Sophocleous said many Canadian companies are attracted to the country’s favourable tax rules. “They have a good communication system and it makes a lot of sense to set up operations there, [particularly for companies looking to access markets in less stable regions] in Eastern Europe or the Middle East.”

Meanwhile, the Cypriot finance minister defied explicit warnings from Angela Merkel, the German chancellor, not to enter into talks with Russia and left Tuesday night for Moscow.

Michael Sarris flew to Russia to plead for aid, despite Mrs Merkel’s spokesman saying: “The chancellor once again emphasised that the negotiations are to be conducted only with the troika [the European Union, European Central Bank and the International Monetary Fund].”

Not one Cypriot MP voted in favour of the eurozone rescue package that had been made conditional by Germany on the Cypriot government finding 5.8-billion euros to pay off its debts by raiding bank deposits, including the savings of up to 60,000 Britons.

Under the original eurozone deal, Cyprus agreed to impose a levy of 6.75% on bank accounts up to 100,000 euros and 9.9% on larger deposits.

Despite a compromise proposal not to tax any bank deposit of less than 20,000 euros, 36 MPs rejected a tax that has rattled financial markets and threatened the islands future as an offshore banking haven for Russian investors. Nineteen MPs abstained.

“There can only be one answer: no to blackmail,” Yiannakis Omirou, the speaker of the Cypriot parliament, said. “This decision is no more than a raid on bank funds. Our demand must be that this deal must be renegotiated. If we pass this tax there will be no foreign investor who will keep their money here.”

Marios Karoyian the leader of Diko, a social democrat party in the country’s ruling coalition, earlier implored MPs to reject the measure: “Our country is under unjust and premeditated attack,” he said. “We want a European rescue, not European destruction.”

Demetris Syllouris, an MP for the Cypriot European Party, accused Germany of designing bail-out terms to target Russian investors and destroy the banking sector in Cyprus.

”Our lenders came not to support us, they wanted to annihilate the pillar of our economy which is the service sector,” he said. “They [Germany] must find another way to resolve their differences with Russia.”

Russian investors have 15.2-billion euros in deposits in Cypriot banks and Russia’s financial sector has loaned up to 35.1-billion euros to companies of Russian origin that operate in Cyprus.

The collapse of the Cypriot banks or capital controls to stop Russians withdrawing their deposits could hit Russia’s own economy hard, putting more than two per cent of its GDP at risk.

There can only be one answer: no to blackmail

”If it was not for Russians here in the last 10 years, there would not be any development in Cyprus,” said Cecilia Shine, a Russian home designer shopping in the Russ Market supermarket in Limassol’s affluent Georgiou A Boulevard.

Ms. Shine, originally from Moscow, warned that many Russians would leave Cyprus – taking their wealth with them – if the tax was implemented. “Russians are leaving and I believe the [eurozone] planned for this,” she said. “When the Russians leave, who is going to take their place? Germany is going to come.”

As the eurozone deal was rejected, Mr Sarris flew to Moscow to seek a four-year delay to an existing Russian loan worth more than 2.3-billion euros and to plead for new funding totalling at least pounds 1.9-billion euros.

”We have a large loan maturing in 2016 and if we manage to come to an understanding this will help facilitate our debt repayments and debt sustainability,” said Andreas Charalambous, a senior Cypriot official in the finance ministry.

”There are other options the minister is going to discuss with the Russian government and investors as our ambitions are going beyond the extension of the loan. We will see if there is potential interest for further investment.”

Thousands of protesters had gathered all day outside the parliament building in central Nicosia as the bail-out plan was debated, and most went away happy.

”Cyprus belongs to its people,” they chanted as the result of the vote was announced. “We told the Germans where to go,” said Costas Georgiou, 35, a food and drinks manager. “This was for everybody – not just us. We support the Russians, but we also did it for Spain, for Italy, for the Portuguese, for whoever they come after next for money. We have saved them. We needed euros 10 billion euros. Imagine what they would do to Italy who need hundreds of billions.”

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